Bloomberg News

Fed’s Fisher Says Low Interest Rate Pledge May Deter Lending

September 12, 2011

(Adds comments on ‘Operation Twist’ in 10th paragraph.)

Sept. 12 (Bloomberg) -- Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s pledge to hold interest rates low until mid-2013 may be sending the wrong signal to consumers.

“It might actually be an incentive to not borrow,” Fisher said today in an interview on Bloomberg Television, “because you know rates are going to be low out to mid-2013.”

The Dallas Fed chief joined presidents Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis last month in posing the most opposition in almost 19 years to a Federal Open Market Committee decision. They dissented from the FOMC’s Aug. 9 decision to hold interest rates near zero at least until mid-2013, preferring instead to maintain a commitment to do so for an unspecified “extended period.”

“We want to make sure we’re not pushing on a string,” Fisher said. “Money is basically free, gas tanks are full. Who steps on the gas pedal? Who engages the transmission?”

Fisher is scheduled to speak today at the annual meeting of the National Association for Business Economics.

Businesses and consumers are “deluged with uncertainty,” Fisher said. The Fed doesn’t address that by holding down the cost of borrowing, he said. “I don’t think that’s why people are not borrowing money right now.”

Fed officials “discussed the range of policy tools” available to boost growth and are “prepared to employ these tools as appropriate,” the FOMC said in its Aug. 9 statement. A few Fed policy makers in August favored more aggressive action to stimulate the economy and lower unemployment, according to minutes of their meeting.

Bigger Move

Those members, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted at the last FOMC meeting to hold its key interest rate at a record low until mid-2013.

Fisher declined to say what policies he may support at the Fed’s next meeting on Sept. 20-21. According to economists at Wells Fargo & Co., T. Rowe Price Associates Inc., Barclay’s Capital Inc. and Goldman Sachs Group Inc., the Fed may decide to replace short-term Treasury securities in its $1.65 trillion portfolio with long-term bonds in a bid to lower rates on everything from mortgages to car loans. The plan is sometimes called “Operation Twist” because it would twist the yield curve.

Fisher said in a separate radio interview that this plan may not be effective with yields already low.

‘Negative Yields’

“We still have negative yields,” Fisher said, referring to the yield of Treasury securities adjusted for inflation. “Part of that is out of our control. There’s a rush to quality. Those that have fear elsewhere in the marketplace are flooding into our Treasuries despite what Standard and Poor’s said about us.”

“The question is how effective would an Operation Twist be,” Fisher said. “It needs to be looked at as it’s one of the possible options. How far can you drive rates down? What else is working in the marketplace? What effect will it have? These are the kind of discussions we need to be having.”

Fisher said he agreed with Fed Chairman Ben S. Bernanke that “inflation is not the issue presently.” Fisher said that “We don’t have dramatic amounts of inflation. I think we’re trending more toward 2 percent.”

Index Rose

The personal consumption expenditures price index rose 2.8 percent from a year earlier in July, compared with 1.2 percent in November when the Fed launched its $600 billion round of asset purchases known as QE2 for the second round of quantitative easing. Excluding food and energy, the index rose 1.6 percent from a year earlier, compared with 1 percent in November. The Fed aims for annual inflation of 1.7 percent to 2 percent.

The Department of Labor said earlier this month that the U.S. economy created no jobs in August. The unemployment rate remained unchanged at 9.1 percent, the 29th consecutive month of unemployment near 9 percent or higher.

Fisher, 62, has been president of the Dallas Fed since 2005. As a voting member of the FOMC in 2008, he dissented five times in favor of tighter policy.

--Editors: James Tyson, Kevin Costelloe

To contact the reporter on this story: Joshua Zumbrun in Dallas at

To contact the editor responsible for this story: Chris Wellisz at

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